Our Opinion: 2025
Not so Tarriffic change
Donald Trump’s tariffs are dominating the global headlines; his bold return to protectionism is rattling markets and escalating tensions with major trading partners like China, Canada, Mexico and the EU.
After much back and forth, the president has most recently announced a 90-day pause on his plan to impose so-called “reciprocal” tariffs on nearly all US imports, but this does not extend to China, where import duties will rise to around 125%. There will be tactical exemptions to come but nevertheless the direction of travel is clear.
The pause on reciprocal tariffs alleviated fears of an immediate global trade war, but it has not restored calm. The threat of inflation looms, ongoing trade tensions are keeping investors cautious, and as yet, there is no clear resolution in sight.
Not since the 1930s has the US so radically increased the level of tariffs on all nations across the world. Back then, those tariffs exacerbated the Great Depression by shrinking global trade and damaging export-dependent industries. Historically, tariffs were a major source of government revenue, but times have changed, and over the past 70 years, they have rarely contributed to more than 2% of federal revenue. Last year, for example, US Customs and Border Protection collected $77 billion in tariffs – just 1.57% of total government income.
Post World War II, the government moved away from protectionism in favour of trade liberalization, but Trump’s approach marks a shift back towards using tariffs as a policy tool, which is a gamble that can bring mixed results.
While they are a powerful negotiation tool, tariffs can also raise costs for businesses and consumers. Roughly half of America’s annual imports, more than $1.3 trillion annually, come from China, Canada, and Mexico, and this means that key industries could be impacted. The automotive industry relies heavily on parts from Mexico and Canada, as do over 70% of crude oil imports, meaning there could be a spike in energy prices. Mexico also supplies over 60% of the fresh vegetables and nearly half of the nuts consumed by the US. Higher import costs could mean higher grocery prices for consumers.
Donald Trump’s baseline 10% tariff and 125% tariff carry significant geopolitical consequences, and as tensions escalate and global supply chains are disrupted, this could put a strain on other diplomatic relationships with countries such as Japan and South Korea. Emerging markets that are reliant on US trade will be put under strain, while more established markets could also see a decline. Pension funds that are tied to global markets also face volatility and see short-term losses if trade tensions worsen.
It’s anyone’s guess at this stage as to what the consequences of all of this will be, but there will be consequences, and they are likely to be felt globally. Will Trump’s bold and turbulent strategy bring back the glory days of manufacturing to the US? The cost of labour alone suggests this is a tall order in a world where other options exist. But this presupposes tariffs are the end game.
But it’s worth keeping in mind that tariffs are only the beginning of a bigger project – namely to realign global trade and force a new ‘Bretton Woods’ agreement with the rest of the world that effectively devalues the dollar to make US exports viable again. The White House wants to strengthen its hands in negotiations for a grand bargain that serves America’s economy.
What we can be certain of is that volatility is here to stay. We have yet to see what realignment in trading relationships this may yet have. Some leaders in the EU have already pointed to closer links with China.
The flight to safety of safer assets has already begun. Amidst global volatility, the UK is emerging as a safe haven for investors seeking stability and reliable, less volatile assets to protect their portfolios. The FT reported that a number of leading UK wealth managers are fielding increasing enquiries from US clients “…looking to move a greater portion of their wealth to the UK…”
Investors, for now, are focusing on assets that offer more predictability amid the rising recession risks of a reset.
This is only the beginning.
14th April 2025
